It appears that the international community is moving toward what many call a landmark agreement to establish a global minimum tax rate for multinational companies. It was about time, but it may not be enough.
Under current regulations, companies can avoid paying their taxes by declaring their income in low-tax jurisdictions. In some cases, if the law does not allow them to pretend that a significant part of their income is generated in some tax haven, they move some parts of their business to these jurisdictions.
Apple became the symbol of tax evasion by declaring the profits made from its European operations in Ireland, and then using another loophole to avoid paying most of the famous 12.5% Irish tax rate. But Apple was by no means the only one to turn the ingenuity behind the products we love so much into a tax evasion of the profits made by selling them to us. They rightly claimed that they were paying every dollar that was their due and were simply making the most of what the system had to offer.
From this perspective, an agreement to establish a global minimum levy of at least 15% is an important step. But the trick is in the details. The current average official rate is considerably higher. Therefore, it is possible, and even probable, that the global minimum becomes the maximum rate. An initiative that began as an attempt to force multinationals to pay their corresponding taxes could generate considerably limited additional revenue, well below the $ 240 billion that is left unpaid annually. And some estimates indicate that developing countries and emerging markets would also receive a small share of this income.
Avoiding this depends not only on preventing a global downward convergence, but also on ensuring a broad and comprehensive definition of what business profits are, such as one that limits deductions for expenses related to capital investments, plus interest, plus losses before joining the business group, plus … Probably, it would be best to agree on standard accounting so that old techniques of tax evasion are not replaced by new ones.
What is particularly problematic in the proposals put forward by the OECD is Pillar One, designed to address tax rights, and which only applies to the largest global companies. The old transfer pricing system was clearly not up to the challenges of 21st century globalization; multinationals had learned to manipulate it to record profits in low-tax jurisdictions. So the US has adopted a method whereby profits are allocated across states based on a formula that takes into account sales, employment, and equity.
Developing and developed countries may be affected differently depending on the formula used: the emphasis on sales would hurt developing countries that produce manufactured goods, but it could help them cope with some of the inequalities associated with the digital giants. And for big tech companies, the value of sales should reflect the value of the data they get, which is critical to their business model. The same formula may not work in all industries.
Even so, it is necessary to recognize the advances made in the current proposals, such as eliminating the test of “physical presence” to establish levies, which is something that does not make sense in the digital age.
Some consider that Pillar One is a reinforcement of the minimum tax, and, therefore, they are not concerned about the absence of economic principles to guide its construction. Only a small part of the benefits that exceed a certain threshold must be allocated, which implies that the total proportion of benefits to be allocated is certainly small. But since companies are allowed to deduct all factors of production, including capital, corporation tax is really a tax on pure income or profits, and all those pure profits should be subject to allocation. Therefore, the request of some developing countries that a larger proportion of corporate profits be reallocated is more than reasonable.
There are other conflicting aspects in the proposals, which are not easy to find (there has been less transparency and less public debate on the details than would have been expected). One has to do with dispute resolution, which obviously cannot be done using the type of arbitration that now prevails in investment agreements; nor should they be resolved in the company’s “home” country (especially since companies without a fixed location look for favorable countries). The correct answer is a global tax court, with the transparency, rules and procedures expected of a 21st century judicial process.
Another problematic element of the proposed reforms is related to the prohibition of “unilateral measures”, which seems aimed at curbing the proliferation of digital taxes. But the proposed threshold of $ 20 billion leaves many large multinationals outside the purview of Pillar One, and who knows what loopholes smart tax attorneys will find. Given the risks to a country’s tax base – and that international agreements are so difficult to reach and large multinationals are so powerful – legislators may have to resort to unilateral measures.
It makes no sense for countries to waive their tax rights for Pillar One, which is limited and arbitrary. The commitments that are requested are disproportionate in comparison with the advantages that are granted.
The G-20 leaders would do well to agree on a global minimum tax of at least 15%. Regardless of the final rate that sets the minimum for the 139 countries currently negotiating this reform, it would be better for at least a few countries to introduce a higher rate, unilaterally or as a group. The US, for example, is shuffling a rate of 21%.
Addressing the multitude of detailed issues required for a global tax deal is critical, and it is particularly important to negotiate with developing countries and emerging markets, whose voice has not always been heard as clearly as it should be.
Above all, it will be essential to review the issue in five years, not seven, as currently proposed. If tax revenue does not increase, as promised, and if developing and emerging markets fail to receive a larger share of this revenue, the minimum tax will have to be increased and the formulas for allocating “tax rights” should be readjusted.
Joseph E. Stiglitz, Nobel Laureate in Economics and Professor at Columbia University, is a member of the Independent Commission for the Reform of International Corporate Taxation.